Equity Analysis /
Pakistan

Pakistan: Implications of the proposed 20-31% increase in gas tariff

    IMS Research Team
    Intermarket Securities
    25 June 2019

    The Ministry of Energy's Petroleum Division (PD) has proposed an increase in gas tariff of 20-31% for the Sui utilities, which we think is aimed at meeting another IMF pre-program condition (IMF Executive Board is expected to take up Pakistan’s request on 3rd July, 2019). Recall that NEPRA has already proposed power tariff increase of PKR1.49/kWh. The gas tariff hike has to be approved by ECC before being implemented; final determination could be lower than the proposal by PD. These increases were already expected by the market, where the central bank raised policy rate in May’19 in anticipation of the same, in our view.

    If implemented as proposed, the increase for all non-domestic consumers will be 31% (based on increase on SNGP network). Gas prices for domestic consumers will rise in the range of 25%-200%, but life-line consumers have been excluded. Sectors which are negatively impacted include Fertilizer, Chemicals and select companies in Cement (LUCK) and Steel (MUGHAL); on the flip side, this is a positive development for the Energy chain, as it will help to reduce circular debt buildup, in our view. 

    It is worth highlighting that we had already incorporated similar power and gas tariff hikes in both our inflation and earnings estimates, except for Fertilizers (refer our comments below). We are expecting CPI to average ~10% in FY20 but flag that CPI readings could cross the 11% mark in 1QFY20 as a result of these tariff hikes. Even though the recent interest rate hike of 150bps preempted these measures, in our view, further increase in the policy rate cannot be ruled out (if inflation overshoots our estimates).

    Impact on the Fertilizer sector: Assuming that the proposed hike in feed and fuel gas of 31% is implemented, FFC will have to increase urea prices by c. PKR140/bag to completely pass on the impact. This scenario will positively impact EFERT/FATIMA/FFBL, which will see earnings rise by PKR0.86/0.23/0.21 per share, respectively. However, failure to increase urea prices will adversely affect profitability of FFC/EFERT/FATIMA/FFBL by PKR3.78/1.82/0.24/0.82 per share. Taking cue from the past, fertilizer manufacturers have mostly passed on the increase in gas price hike, and it is a likely scenario this time as well, in our view. If prices are raised (subject to approval of the proposed gas tariff hike), this would be an opportune time for the government to resolve the pending GIDC issue in order to rationalize urea prices, in our view.